The actions of McDonald’s, the largest fast food chain in the world, closed 2024 at practically the same level at which they began the year, while the S&P 500 grew a notable 24%. This opens a question about investment through Cedears, one of the papers that are usually present in portfolios.
The outbreak of Escherichia colimediocre quarterly results and increasing pressure on gross margins are some of the factors explaining this lagging performance compared to the market.
Impact of the Escherichia coli outbreak
The most significant event of the year for McDonald’s was an Escherichia coli outbreak linked to contaminated onions used in their burgers. This incident, which affected more than 100 people and caused at least one death, eliminated the profits accumulated until the middle of the year. The impact not only hit the company financially, but also its reputation, affecting consumers’ perception of food safety.
Uneven financial results and sales
In financial terms, McDonald’s reported revenue of $6.9 billion in the third quarter of 2024, just 3% above the previous year. However, costs grew faster than revenue, leading to a 3% drop in net profit to $2.3 billion. Global comparable sales decreased 1.5%, while in the United States they barely grew 0.3%.
Despite a more resilient local market, with a more moderate drop in sales of just 0.7% in the second quarter, McDonald’s faces an adverse global outlook. Consumers, particularly those with lower incomes, are beginning to resist continuous price increases on their menus, a strategy used to mitigate the effects of inflation.
Pressure on margins and declining traffic
The low-price model, historically a strength of McDonald’s, faces difficulties in a context where inflation and operating costs pressure gross margins. The company has already warned that traffic in quick-service restaurants in the United States will be negative in 2024, a worrying indicator for the sector.
Internationally, McDonald’s major markets, such as the United Kingdom, Germany and Japan, are also showing signs of slowing traffic. This poses an additional challenge for the company, which relies on high sales volume to remain profitable.
Long-term perspectives: digitization and home delivery
Despite the current difficulties, McDonald’s has reason to be optimistic in the long term. Its investment in digital platforms and delivery services has been aggressive, positioning it as a leader in these segments in the fast food sector. Additionally, the company benefits from strong liquidity and a proven ability to adapt to complex economic environments.
From a valuation standpoint, McDonald’s shares are currently trading at a price-to-earnings (P/E) multiple of 25 times, below its five-year historical average of 28 times. This suggests there is potential for moderate growth, provided the company can overcome current headwinds and leverage its strategic strengths.
Projections and current valuation
Looking ahead, Citigroup expects McDonald’s revenue to reach $26.2 billion in fiscal 2024, which would represent a 3% increase compared to 2023. With projected earnings per share of $11.81 and P/E multiple of 24.9 times, the firm estimates a target price of $294 per share, in line with its current price.
In conclusion, McDonald’s faces a challenging environment marked by reputation issues, tight margins, and declining traffic. However, its initiatives in digitalization, delivery and culturally relevant menus could pave the way for a rebound in the long term.
Source: Ambito
